Cupcake Bakery to Go Public in Merger

By PETER LATTMAN

Published: January 10, 2011

Phil Marino for The New York TimesAmy Tepper at a Crumbs Bake Shop in Woodbury, N.Y. The company operates 34 stores.The cupcake craze is getting crazier.

Crumbs Bake Shop, the country's largest cupcake chain, will go public through a $66 million merger with an investment company, the 57th Street General Acquisition Corporation.

The deal, which is expected to be announced on Monday, gives Crumbs the money to execute its ambitious expansion plans.

The growth plans for Crumbs come as so-called gourmet cupcake shops are proliferating across the country. Sprinkles, based in Los Angeles, began with one location in Beverly Hills and now has seven with plans for three more. Washington is filled with cupcake stores, led by Georgetown Cupcake, whose owners had their own reality show on cable TV. There is also Magnolia Bakery in New York, with three locations and a permanent place in the cupcake canon in part because of a cameo on ''Sex and the City.''

Started by Jason Bauer, and his wife, Mia, in 2003 with a single bakery in New York City, Crumbs has grown rapidly, and now operates 34 stores across six states, from Calabasas, Calif., to Clarendon, Va. Mr. Bauer, its chief executive, said in an interview that Crumbs planned to expand to 200 locations by 2014.

Last year, Crumbs posted an estimated $31 million in revenue and generated $2.5 million in earnings before interest, taxes, depreciation and amortization. That translates into about 13 million cupcakes sold, Mr. Bauer said.

The investment company will pay Crumbs $27 million in cash and $39 million in stock. Crumbs owners also stand to receive an additional $44 million in stock depending on the company's future stock performance and earnings. The deal is expected to close next month, resulting in Crumbs shares' being listed on a major exchange.

The Bauers will retain a substantial stake in the business and continue to run the company. Edwin Lewis, a well-known former fashion executive who acquired 50 percent of Crumbs for $10 million in 2008, will remain on the company's board.

Crumbs appeared on the scene at the same time that a wave of cupcake shops were popping up across the city. In November 2003, The New York Times ran a feature on cupcake mania.

''In New York, cupcakes are not lopsided school-bake-sale affairs,'' the article said. ''They are art, they are fashion, they are a tourist attraction and they can be big business.''

The company's flagship product is its $3.75 cupcake - an oversize confection in flavors like apple cobbler, cookie dough and dulce de leche. There is also the ''half baked,'' a 590-calorie marble cake cupcake that has both vanilla cream cheese frosting and chocolate fudge.

Crumbs has a business model more corporate than many of its competitors, like Magnolia Bakery, whose shops have a nostalgic feel. Although all of Crumbs's cupcake recipes are Mrs. Bauer's, says her husband, there are no kitchens or ovens on the premises. Instead, Crumbs outsources of all of the baking to commercial baking facilities.

The 57th Street General Acquisition Corporation is a so-called special-purpose acquisition company - a publicly held investment fund that has no operations of its own but a pool of capital that is set up to acquire an operating business. It was formed last year by Mark Klein, the former chief executive of Ladenburg Thalmann, a small New York investment bank.

The news that Crumbs is going public may provoke skeptics who will say this signifies a cupcake bubble. Many struggling food chains with faddish concepts have expanded too rapidly in recent years, including Cosi and Jamba Juice. But Mr. Bauer dismissed such worries.

''I've been in this business for eight years, and we've grown it every year,'' he said. ''If I had a nickel for every time someone asked me if cupcakes were a fad, I wouldn't need to do this deal.''

This is a more complete version of the story than the one that appeared in print.

PHOTO: Amy Tepper at a Crumbs Bake Shop in Woodbury, N.Y. The company operates 34 stores. (PHOTOGRAPH BY PHIL MARINO FOR THE NEW YORK TIMES)